While global conflicts, rising inflation and volatile financial markets have created unprecedented hurdles for global businesses and investors over the past year, according to The European Family Office Report 2023 by Campden Wealth in partnership with HSBC Global Private Banking, European Family Offices (FOs) have displayed typical resilience and adaptability.
The report found that despite the disappointing performance of financial markets throughout 2022, European FOs fared surprisingly well. Although a third of family offices reported a reduction in assets under management (AUM), more than half (53%) reported an increase, including 16% reporting an increase of more than 10%. Likewise, when asked how their investment portfolio performed relative to benchmark, 40% of respondents reported that it had outperformed compared to 24% who indicated underperformance.
“Despite the challenges of 2022, Campden Wealth’s research has shown that the success of European family offices can best be attributed to the proactive management of their investments,” says Adam Ratner, Campden Wealth’s Director of Research. “Many family offices reported a pre-emptive shift towards alternative asset classes in an effort to hedge against inflation. These strategic decisions have clearly played a crucial role in their ability to weather the storm.”
According to the report, a key feature of family office investment in recent years has been an ever-increasing allocation to private markets. This now constitutes 28% of AUM and is the largest asset class alongside equities. However, family offices still expect private equity and venture capital to supply the best long-term returns despite relatively disappointing outcomes last year. Going forward, a net 28% of family offices intend to increase their allocation to direct private equity and a net 21% to venture capital and real estate.
“We have seen a significant trend in family offices increasing their exposure to private equity in recent years, including in direct deals, as clients look to the private markets to broaden the opportunity set,” says Caroline Kitidis, Global Head of UHNW, HSBC Global Private Banking. “Many family offices are attracted to the long-term approach of private markets, as well as the ability to use the asset class for diversification purposes and higher return expectations.”
The report is based on a statistical analysis of 102 survey responses from European single family offices and private (not commercial) multi-family offices, with an average net worth (including operating businesses) of US $1.7 billion and a collective wealth of US $177 billion. The family offices surveyed have, on average, US $900 million in AUM and aggregate AUM of US $91 billion.
ATTRACTIVE INVESTMENT OPTIONS AND EMERGING TECHNOLOGY
Research also found that European family offices consider developed market bonds and equities as attractive investment options, with close to 15% of family offices indicating their belief that, as US inflation decreases, the Fed may begin a cycle of interest rate reductions.
“This trend suggests that family offices are subscribing to the notion that inflation, especially in the United States, has reached or is approaching its peak,” says Adam Ratner. “As inflation recedes, the expectation is that the Federal Reserve will initiate interest rates cuts. Bonds are favoured over equities due to the expectation of the US economy hovering near recessionary territory for the foreseeable future.”
From an operational perspective, the report discovered that the adoption of relatively new wealth aggregation platforms, which can provide an overview of an organisation’s financial position by consolidating data from multiple banks and investment managers, is still relatively low (38%) but can be expected to rise rapidly, given the percentage of family offices keen to take advantage of these platforms.
“I think several factors have contributed to the slow adoption of wealth aggregation platforms,” says Adam Ratner. “Beside cost considerations, the abundance of choices in the market makes the selection process time-consuming. Moreover, the rapid pace at which these platforms are being upgraded and improved adds to the challenge of identifying the best solution for the diverse needs of different family offices.”
GOVERNANCE STRUCTURES AND SUCCESSION PLANNING
From a governance standpoint, family offices see their top priority as determining investment policy and managing investment risk. An investment committee is the prevalent governance structure found in 85% of European family offices. Frequently, families also have one or two other governance structures such as a family office board or a family council. Strategic investment guidelines and a mission statement are seen as the most common documentation supporting family office governance.
“Governance in family offices has been growing in importance over the years as families become more attuned to the importance of clear roles and responsibilities as enablers for their shared vision and goals for the wealth,” says Andra Ilie, Senior Adviser, Family Office, Governance & Philanthropy, EMEA, HSBC Global Private Banking. “Forums such as family councils, family assemblies and investment committees are examples of governance mechanisms aimed at encouraging family collaboration, collective decision making and conflict management, while creating a risk management infrastructure for the wealth. Oversight and controls are helpful in keeping family members involved, as well as accountable, while providing transparency by sharing information and updating the stakeholders on progress towards the family’s joint goals.”
As the global succession event continues, European family offices feel the most critical factor for successful succession planning is to start early, introducing Next Gens to family values (92%). But it’s also imperative that the existing family leadership embrace the issue of succession planning as critical (88%). Other challenges to succession planning include next generation members being too young to plan for their future roles or insufficiently qualified to assume control.
“Open communication, transparency and robust planning are some of the top themes sat at the core of successful family office succession,” says Robert Kalff, Head of Family Office Coverage, UK & UK International, HSBC Global Private Banking. “A clear wealth vision and solid family values permeating family interactions can help the next generations accustom themselves at an early age with the family norms and set expectations for behaviours, roles and responsibilities.
“Having a clear educational plan, be it formal or informal at an early age, can help equip members of future generations with the relevant skills to become future owners and/or managers of the wealth. Furthermore, such plans should be articulated as part of a wider family governance framework and discussed with the next generation as soon as they are able to part-take. As with any governance mechanism, stakeholder buy-in is key and involving the next generation in writing their own part in the future play of their family’s wealth is critical to success.”